The Supreme Court’s Chance to Rebuild a ‘Constitutional Bulwark’

The Contract Clause has been moribund since 1934. The justices could revive it in a case from Minnesota.

 
 

The Supreme Court’s Chance to Rebuild a ‘Constitutional Bulwark’
PHOTO: ERIC THAYER/REUTERS
 

An obscure dispute over life insurance could breathe new life into a long-neglected constitutional safeguard for economic freedom.

In 1998, Mark Sveen named Kaye Melin, then his wife, primary beneficiary of an insurance policy. The couple divorced almost a decade later, and Sveen died in 2011. He hadn’t changed his policy, but in 2002 Minnesota had passed a law automatically removing a spouse as a life-insurance beneficiary if the couple divorces. Sveen’s children claim to be the rightful beneficiaries. On Monday the U.S. Supreme Court considers whether Minnesota violated the Constitution’s Contract Clause.

Sveen v. Melin is the first Contract Clause case to appear before the high court in more than 25 years. By accepting this case, the justices may be signaling a willingness to restore the clause, which has fallen into disuse, to its historical vigor.

Unlike some other disputed constitutional provisions, the clause is unequivocal: “No State shall . . . pass any . . . Law impairing the Obligation of Contracts.” James Madison called it a “constitutional bulwark in favor of personal security and private rights.” The Contract Clause was one of the few curbs on state government power placed in the original Constitution.

When it was drafted, the nation’s economy was still reeling from the Revolutionary War. Recovery was hindered by many state legislatures, which passed debt-relief measures that often infringed on contracts. The risk that contracts could be rewritten at will caused investor confidence to plummet and credit markets to shrink. 

The framers became convinced that contractual stability was a necessary condition of prosperity. Moreover, inviolable contracts could promote fairness and equity, since politically connected factions would not be able to gain an advantage through legislative interference.

In the century after ratification, the Supreme Court routinely cited the Contract Clause to invalidate schemes to discharge debts, repudiate bonds or halt mortgage foreclosures, while upholding grants of tax exemptions and corporate charters (including, most famously, for Dartmouth College). In fact, the first federal-court decision striking down a state law, in 1792, relied on the Contract Clause.

In 1878 Justice William Strong wrote that there was “no more important provision in the Federal Constitution” than the Contract Clause: “It is one of the highest duties of this Court to take care that this prohibition shall neither be evaded nor frittered away.” By 1890, almost half of all Supreme Court decisions that ruled a state law unconstitutional were invalidated under the clause.

But starting in the late 19th century, the justices began ruling that the clause did not apply to a state’s “police power” over health, safety and morals. The exceptions multiplied, culminating with the 1934 decision Home Building & Loan Association v. Blaisdell, in which the court upheld a state moratorium on mortgage foreclosure imposed during the Great Depression, virtually eviscerating the clause.

In the late 1970s, the Contract Clause briefly resurfaced when the High Court struck down laws in New Jersey and Minnesota that retroactively altered contracts. In one of the cases, Justice Potter Stewart felt it necessary to declare that the Contract Clause “remains part of the Constitution. It is not a dead letter.”

But if it wasn’t quite dead, it appeared moribund. Not only were both rulings narrow and technical, the Supreme Court also created a convoluted, multipronged test to decide Contract Clause cases. Instead of simply determining whether a state law impairs the obligation of contracts—and thus violates the clause’s plain languages—judges have to decide if a law causes a “substantial impairment” of contract rights, if the law advances a “significant and legitimate public purpose,” and if the law’s approach is “reasonable” and “appropriate,” with wide deference granted to lawmakers.

This muddled and malleable test would have baffled Chief Justice John Marshall, who observed in an 1819 decision that the Contract Clause was “incapable of being misunderstood.” The clause was based on “the inviolability of contracts,” he wrote, which “was to be protected in whatsoever form it might be assailed.” 

Sveen v. Melin gives the justices a path to return to the clause’s original meaning. A ruling for Ms. Melin would set an important precedent that could advance liberal priorities as well as conservative ones. With a reinvigorated Contract Clause, laws that impose rent control, alter franchise agreements, abolish teacher tenure, or modify public employees’ benefits could all be scrutinized for infringing existing contracts. Restoring the Contract Clause to its rightful place in the constitutional order would also help ensure respect for the rule of law.

Mr. Ely is a professor emeritus of history and law at Vanderbilt and author of “The Contract Clause: A Constitutional History.” Mr. Sibilla is a legislative analyst at the Institute for Justice. The Institute and Mr. Ely co-wrote a friend-of-the-court brief supporting the respondent in the Sveen case.

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